There's a major issue overhanging this earnings season that could separate the winners from losers

Published Wed, Apr 13 202211:05 AM EDT

Jesse Pound @/in/jesse-pound @jesserpound

As another earnings season ramps up, one issue is at the top of the list of concerns for investors and company executives: labor. The rapid labor market recovery from the depths of the pandemic has led to surging nominal wages and a big gap between open jobs and the number of Americans actively looking for work. That rising cost and disconnect between supply and demand seems poised to bleed into corporate earnings. An analysis by RBC Capital Markets showed that the mention of labor costs in transcripts of earnings calls and other corporate events hit its highest level in March since at least 2013. And of the first 20 S & P 500 companies who reported earnings this cycle, 13 cited labor costs as an issue, according to a report from FactSet. "Labor costs and shortages have been cited by the highest number companies in the index to date as a factor that either had a negative impact on earnings or revenues in Q1, or is expected to have a negative impact on earnings or revenues in future quarters," FactSet's John Butters said in a note. David Marberger, the CFO at Conagra Brands , explained in an April 11 conference call how labor issues can hold a company back from its productivity goals. Conagra reported higher-than-expected sales for the fourth quarter, but its earnings per share were in line with estimates as gross margins were under pressure, according to StreetAccount. "It almost can become a double whammy because you're not driving the savings and you have to pay additional costs just to get the right staff to be able to produce what you need," Marberger said, according to a transcript from FactSet. Even for the companies that beat earnings expectations, labor costs could be a big theme. Thomas Werner, CEO of food processor Lamb Weston , pointed to rising labor costs and a shortage of workers, exacerbated by the omicron wave of Covid, as a challenge for the company in an April 7 conference call. "Factory labor remains challenging as we remain below preferred staffing levels, but we're making steady progress in a highly difficult labor market," Werner said. "We're addressing the labor gap by focusing on retention and new ways of attracting talent. We'll continue to push hard on our staffing initiatives and are encouraged by improvements we're seeing. However, we'll take time to get all of our factory staff where they need to be." How to invest While rising labor costs appear to be hitting every company, the impact can vary widely from firm to firm. Some companies and industries are much more labor intensive than others. Restaurants, for example, are often low margin businesses with relatively high labor costs as a percentage of sales. Goldman Sachs has a basket of low labor cost stocks, measured by expenses relative to revenue. The basket includes stocks with global supply chains like Apple and Under Armour . Other names on the list with very low labor costs include Diamondback Energy and drug distributor AmerisourceBergen , which have gained roughly 29% and 22%, respectively, year to date. Source: Goldman Sachs Another factor to look at it is pricing power , or price elasticity or demand. Some companies are able to pass on those higher labor costs to consumers without seeing a drop off in unit sales, protecting profit margins. In an April 12 note, Credit Suisse analysts looked at consumer staples stocks with strong pricing power, and identified Coca-Cola and Hershey as two of the best names in that sector. Coca-Cola also appeared in Goldman's low labor cost basket. The beverage stock has gained about 9% year to date. — CNBC's Michael Bloom contributed to this report.

A help wanted sign is posted in the window of hardware store on September 16, 2021 in San Francisco, California.

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As another earnings season ramps up, one issue is at the top of the list of concerns for investors and company executives: labor.